Structural Features of

Under-development
 Applicability of Walrasian framework in developing
economies: challenges
Standard Walrasian Assumptions:
• Constant returns to scale,
• Pure competition,
• Perfect information,
• Insignificant transaction costs and externalities,
• Supposed institution-neutrality,
• Price- sensitive adjustments in market clearing
• Full employment
• Separability of equity and efficiency
Stiglitz (1989) reminds us: A study of LDC's is to economics what the study of
pathology is to medicine; by understanding what happens when things do not work
well, we gain insight into how they work when they do function as designed. The
difference is that in economics, pathology is the rule: less than a quarter of mankind
lives in the developed economies.
 What makes developing countries different?
• Lower levels of living and productivity
• Lower levels of industrialisation and manufactured exports
• Persistent unemployment
• Higher levels of inequality and absolute poverty
• Higher population growth rates
• Low levels of human capital
• Greater social fractionalization
• Larger rural population but rapid rural urban migration
So, developing countries are like
• Adverse geography neighborhoods that face different
challenges than the developed
• Underdeveloped financial and other markets ones. They might not have as much
money, jobs, or opportunities,
which can make it harder for them
to improve their lives.
Low levels of living
and productivity

Share in global income

 Lower level of structural transformation
Table 1: Share of various sectors in total GDP
Agriculture Industry Manufacturing Services • Industrialisation is
Europe &
2005 2016 2005 2016 2005 2016 2005 2016 associated with high
Central Asia 3 2 28 26 17 16 70 72 productivity and
Latin America
& Caribbean 6 6 34 27 18 14 60 68
incomes. and has been
Middle East & hallmark of
North Africa 6 6 51 37 14 12 45 57
North America 1 1 22 20 13 12 77 79
modernization and
South Asia 20 18 32 28 18 16 48 54 national economic
Sub-Saharan
Africa 21 17 32 24 11 11 48 58
power
Low income
Lower middle
33 30 21 22 11 8 46 48
• Higher dependence on
income 20 16 33 30 17 17 48 54 primary exports:
Upper middle
income 8 7 40 34 24 21 51 59 agriculture, mining
High income 2 1 27 24 16 15 72 74
Structural transformation
Why living standard, industrialisation and productivity
are low? Government and Market Failures
Government failures
• Policy biases towards politically-connected and large firms, failures due to
licensing and other regulatory barriers, or even uncertainty of policymaking.

• Stern (2001) describes government imposed barriers like high inflation and
macroeconomic instability, high government wages (which distorts the proper
operation of labour markets), arbitrary regulations, a large tax burden,
corruption, burdensome licensing requirements, etc., as the most important
impediments of investment climate.

• All these create dualistic economic structures which discourages

entrepreneurial activity and hence, economic growth.
Market failures: Dynamic externalities
• Technological and pecuniary externalities leading to market failure
• Technological externalities refer to spill over from one firm’s investment on the
productivity of other firms
• Pervasiveness of externalities in the innovation process, in the transfer, absorption, development
and adaptation of new technologies
• through learning, skill-formation, machine user-supplier interaction, networks of technology
diffusion- human capital
• difficulty of identifying the few sectors and locations where the spillover effects may be large and
particularly difficult to internalize.
• Pecuniary externalities, investment in one sector depends on the investment in other
sectors- complementarities, leads to coordination failure
• Concepts we are going to study: Under-development trap- multiple equilibrium-
Hysteresis - Big push

For a detailed discussion of government and market failures in Indian context see Kar and
Jha(2021) (http://iegindia.in/upload/profile_publication/doc-241121_110341WP449f.pdf)
Persistent unemployment and non-clearing markets
• Puzzle of coexistence of a significant positive wage and massive
unemployment and underemployment in developed as well as developing
countries.
• For the densely populated agriculture of poor countries where trade unions
are weak and minimum wage legislations are non-existent, we can see this
kind of unemployment or underemployment.
• Explanation: At too low a wage, the productivity of a worker may also be too
low for the employer to be interested in hiring him or her. This is called
efficiency wage.
• In this context, higher wage leads to better productivity which enhanced
incentives, morale and effort-intensity.
• Price has functions other than market clearing Walrashian Equilibrium-
Separability of equity and efficiency-
• better distribution of land may lead to improvement in productivity- whether
a market economy is Pareto efficient or not depends on distribution.
 • Poverty is the most visible
Poverty characteristic of economic
underdevelopment.

• Poverty strikes at the core of ongoing

existence- destroys the aspirations,
hopes, and enjoyment of the future as
well

• Effectively takes away the rights of a

human being to live in good health, to
obtain an education, and to enjoy
adequate nutrition

• Though there is exponential growth

in global income, rates of poverty
reduction is much slower.
Understanding Global Poverty: Challenges,
Progress, and Factors Driving Change
• Global poverty is a complex issue that impacts millions of people
worldwide.
• Poverty is characterized by a lack of basic resources such as food,
water, healthcare, and education.
• In 2019, around 700 million people, or 9.2% of the world's
population, lived in extreme poverty on less than $1.90 per day.
• Poverty rates have decreased significantly over the past few decades,
but it still poses a significant challenge for many countries and
communities.
Understanding Global Poverty: Challenges,
Progress, and Factors Driving Change

• Poverty is often concentrated in certain regions of the world,

particularly in Sub-Saharan Africa and South Asia, where it is linked to
limited access to education, healthcare, and economic opportunities.
• Progress has been made in reducing global poverty, with the
percentage of people living in extreme poverty declining from 36% in
1990 to 9.2% in 2019.
• Various factors have driven this progress in reducing global poverty.
Understanding Poverty Measurement:
Variations and Challenges

• The way poverty is measured and understood depends on the

definition used, which varies depending on the context.
• Richer and poorer countries have different poverty lines to measure
poverty that are relevant to their citizens' income levels.
• In the United States, a person is considered to be living in poverty if
they earn less than about $24.55 per day, while in Ethiopia, the
poverty line is set at $2.04 per day.
• To measure poverty on a global scale, we need to use a consistent
poverty line across all countries.
 Understanding Poverty Measurement:
Variations and Challenges
• The International Poverty Line, set at $2.15 per Figure 1: Natural poverty lines, poverty rates, and income
in five countries
day by the World Bank and used by the UN to
monitor extreme poverty worldwide, aims to
provide a consistent measure.
• Figure 1 shows that the poverty line is very low,
reflecting the standards of living in the world's
poorest countries.
• The poverty line is much lower than the cost of a
healthy diet, highlighting the significant
challenges faced by people living in extreme
poverty.

Source: Our World in Data

 Global Progress and Remaining
Challenges in Poverty Reduction
• There has been a significant reduction in Figure 2: The share and number of people living in extreme
poverty
extreme poverty in the past generation.
• Figure 2 shows that the number of
people living below the International
Poverty Line of $2.15 per day has
decreased by over a billion since 1990.
• On average, the number of people living
below the poverty line declined by 47
million per year or 130,000 people
every day.

Source: Our World in Data

 Global Progress and Remaining
Challenges in Poverty Reduction
• Despite this progress, the extent of Figure 2: The share and number of people living in extreme
poverty
global poverty remains substantial.
• According to the latest global
estimates, in 2019, approximately
650 million people, or about one in
twelve, lived on less than $2.15 per
day.

Source: Our World in Data

 The Impact of COVID-19 on Global Poverty:
Preliminary Estimates and Projections
• The COVID-19 pandemic has caused a Figure 3: The number of people living in extreme
significant increase in extreme poverty. poverty globally

• Figure 3 shows that the global economic

downturn caused by the pandemic has had a
devastating impact on the world's poorest.
• Preliminary estimates by World Bank
researchers indicate that the number of
people living in extreme poverty increased by
approximately 70 million in 2020, which is
the first significant rise in a generation.

Source: Our World in Data

 The Impact of COVID-19 on Global Poverty:
Preliminary Estimates and Projections
• The number of people living in Figure 3: The number of people living in extreme
poverty globally
extreme poverty is expected to
remain between 70 and 90 million,
higher than what would have been
expected in the absence of the
pandemic.
• Based on initial estimates, the
global extreme poverty rate rose to
about 9% in 2020.

Source: Our World in Data

 The Future of Extreme Poverty:
Projections and Forecasts
• Current trends suggest that hundreds of Figure 4: The number of people in extreme poverty
including projections in 2030
millions of people will remain in extreme
poverty.
• Figure 4 shows that the decline in extreme
poverty in the last generation was due to
strong economic growth in Asian countries.
• Most of the world's poorest people now live
in Sub-Saharan Africa where weaker
economic growth and high population growth
have led to an increase in extreme poverty.

Source : Our World in Data

 The Future of Extreme Poverty:
Projections and Forecasts
• Projections of global extreme Figure 4: The number of people in extreme poverty
including projections in 2030
poverty up to 2030, based on
economic growth forecasts,
indicate a bleak future if weak
economic growth persists in the
world's poorest countries.
• Hundreds of millions of people
could be living in extreme poverty
for many years to come if this trend
continues.
Source : Our World in Data
 Progress Against Extreme Poverty:
Evidence from Global Data
Figure 5:Share of population living in extreme
• Figure 5 and maps in Figure 6 poverty, 1977–2021

demonstrate a significant reduction

in extreme poverty in many
countries over the past generation.
• This progress indicates that it is
possible to put an end to poverty. Figure 6: Share of population living in extreme poverty,
1990 and 2021
• Data on extreme poverty highlights
a crucial lesson—that rapid
progress against poverty is
achievable.
Source : Our World in Data
 Progress Against Extreme Poverty:
Evidence from Global Data
Figure 5:Share of population living in extreme
• Many people may believe that poverty, 1977-2021

poverty is inevitable, making efforts

to tackle poverty seem futile.
• However, the significant progress
seen in many countries
demonstrates that this perspective Figure 6: Share of population living in extreme poverty,
1990 and 2021
is incorrect.

Source : Our World in Data

 Global Poverty: Progress and
Challenges Ahead
• Progress has been made in fighting global Figure 7: Share of the world population living in poverty
poverty over the past 200 years, but higher
poverty lines have only recently declined.
• Despite progress, poverty rates at higher
poverty lines are still high.
• 25% of the world's population lives on less
than $3.65 per day, similar to low-middle
income countries' poverty lines.
• 47% of the world's population lives on less
than $6.85 per day, similar to poverty lines in
upper-middle income countries.
Source : Our World in Data
 Global Poverty: Progress and Challenges
Ahead
• 84% of the world's population lives Figure 7: Share of the world population living in poverty

on less than $30 per day, similar to

high-income countries' poverty lines.
• Economic growth has allowed many
people to escape extreme poverty,
but the world remains poor by the
standards of rich countries.
• Achieving significant economic
growth is necessary to change this.
Source : Our World in Data
 Required Growth Rates for Reducing
Poverty Globally
• Max Roser calculated growth rates
required for different countries to reach
Figure 8: By how much would mean
incomes need to increase to be at the
level of Denmark’s mean income?

Denmark's level of income.

• Figure 8 displays the increase in average
income required for each country to
reach Denmark's income level, taking into
account population size and future
growth.
• Ethiopia has one of the lowest average
incomes and would require a 16.7-fold
increase to reach Denmark's level.
Source : Our World in Data
 Required Growth Rates for Reducing
Poverty Globally
Figure 8: By how much would mean
• Countries with lower average incomes than incomes need to increase to be at the
Ethiopia would require even higher growth to level of Denmark’s mean income?
reach Denmark's level, while richer countries than
Ethiopia would require less growth.
• The richest countries are already at or above
Denmark's level and would only need to reduce
inequality to reach the same poverty level.
• To achieve a hypothetical scenario of reducing
global poverty to Denmark's level, it would
require a minimum of 410% growth, equivalent to
a 5.1-fold increase in the global economy.

Source : Our World in Data

 Required Growth Rates for Reducing
Poverty Globally
Figure 8: By how much would mean
• This indicates that a world economy incomes need to increase to be at the
level of Denmark’s mean income?
with significantly less poverty
would need to be at least five times
larger than the current global
economy.

Source : Our World in Data

Vicious Cycle
of poverty
• Dysfunctional institutions or persistence of extractive
institutions - Transaction costs as barriers to entry and
exit
• Transaction costs are costs of doing business related to gathering
information, monitoring, establishing reliable suppliers, formulating
contracts, obtaining credit, and so on.
• Self-reinforcing forces, like increasing returns from adopting a
particular institution locking in what may turn out to be an
inferior institution in the long run or like a mutually sustaining
network of social sanctions on deviants
• Example of the Indian caste system- how economically
unprofitable or socially unpleasant customs may persist as
Nash equilibria when each individual conforms out of fear
of loss of reputation from disobedience
• Missing markets (in case of credit insurance etc.)
• Asymmetric information
• Share-cropping- ancient institution as a compromise
between risk and work incentive effects-is one of the
first fully worked out principal-agent models
• Moral hazards in credit market
• Risk-pooling advantages of a large formal credit
market and the monitoring advantages of local,
informal, sometimes non-market, lending
 Migration
• Migration: The movement of persons away from their place of usual
residence, either across an international border or within a State
• Migrant is a person who moves away from his or her place of usual
residence, whether within a country or across an international border,
temporarily or permanently, and for a variety of reasons. Migrant
workers; persons whose particular types of movements are legally
defined, such as smuggled migrants; as well as those whose status or
means of movement are not specifically defined under international
law, such as international students.
• Excludes movements that are due to “recreation, holiday, visits to
friends and relatives, business, medical treatment or religious
pilgrimages”
• Ref: Glossary, International Organization for Migration (IOM)
 International migration:
some facts

The international migrant

population globally has increased
in size but remained relatively
stable as a proportion of the
world’s population
Almost two-thirds (64%) migrants
go to High Income Countries.
Source: World Migration Report
 Destination Origin
India is the largest source of
migrants.

US is the most coveted

destination.
Millions of people

Top two destinations for migrants

from India and US and UAE
Push migration
Pull migration

Source: World Migration Report

Types of internal migration:
India
Patterns of inter-state migration • India is estimated to have
some 120 million rural-to-urban
migrant workers.
• A third of the migrants hail from
Uttar Pradesh, 15% from Bihar
and 6% from Rajasthan
• Nine out of every ten work in the
informal sector
• Majority of them earn less than
5000 per month
• Without any social protection, do
not possess ration cards at their
place of work
Why do people migrate?
 Who are the migrant workers?

According to the 2011

Census, there are 63
million child migrants Dalits work
in India, of which 30
million are female mostly at the
lowest end of
the work strata
Migration and remittances
Fig: How the top ten remittance recipients have shifted since 1995
Larger rural population but rapid rural urban migration
Migration and
Urbanisation
Megacities: Cities with 10 Million or More Inhabitants Relationship Between Urbanisation and Per Capita GDP,
2010, with Comparison to Relationship in 1960

Source: Todaro and Smith (2020) Source: Todaro and Smith (2020)
 Migration and development
• Internal migration disproportionately increases the growth rate of urban job
seekers relative to urban population growth- well-educated young people in
the migrant system
• Second, on the demand side, urban job creation is generally more difficult and
costly to accomplish than rural job creation because of the need for
substantial complementary resource inputs for most jobs in the industrial
sector.
• Moreover, the pressures of rising urban wages and compulsory employee
fringe benefits in combination with the unavailability of appropriate, more
labor-intensive production technologies means that a rising share of modern-
sector output growth is accounted for by increases in labor productivity.
• We are going to study in detail the theories of migration (Lewis, Renis-fei and
Todaro)
Higher population growth rate
Population growth rates and level of development
2.8 2.8
2.6
2.5
2.4
2.3
2.2

1.8
1.7
1.6 1.6
1.4

0.8 0.8 0.8

0.7 0.7 0.7 0.7

1985 1990 2000 2005 2010

Very high human development High human development
Medium human development Low human development
 Key concepts
• Crude birth rate: The crude birth rate is the number of live births occurring
among the population of a given geographical area during a given year, per
1,000 mid-year total population
• Crude death rate: The crude death rate is the number of deaths occurring
among the population of a given geographical area during a given year, per
1,000 mid-year total population of the given geographical area during the same
year
• Fertility rate: average number of children that would be born to a woman over
her lifetime if: She were to experience the exact current age-specific fertility rate
• Replacement rate: “Replacement level fertility” is the total fertility rate—the
average number of children born per woman—at which a population replaces
itself from one generation to the next, without migration. This rate is roughly
2.1 children per woman for most countries, although it may modestly vary with
mortality rates
 Demographic transition: 5 stages
•Stage 1: In the long time before modern population growth the birth rate is high, but
since the death rate is also high we observe no population growth.
•Stage 2: Health slowly starts to improve and the death rate is dropping. Since the
health of the population has already improved, but fertility still remains as high as
before, this is the stage of the transition at which the population increases rapidly.
•Stage 3: This is when fertility declines as a result of the social changes: mortality of
children is not as high as it once was and they therefore opt for fewer births, the
economy is undergoing structural changes that makes children less economically
valuable, and women are empowered socially and within partnerships. The fertility rate
is declining steeply.
•Stage 4: The population growth comes to an end and in stage 4 as the birth rate
catches up with the low mortality rate.
•Stage 5: at very high levels of development fertility is rising again. Not to the very levels
of the pre-modern times, but to a fertility rate around 2. As a consequence of this the
natural population growth rate will be at 0% or possibly slightly above.
Why death rates started declining?
• Sanitary practices improved
• Vaccination started
• Life saving medicines (anti-biotics); better surgical procedure
• Public health care in Europe
• Availability of food increased
• Wages and living conditions improved
Why birthrates started declining later?
• Better family planning- birth control measures- remained limited
when there was low awareness and
• Industrial revolution- urbanization-
• Women’s work, education, war leading women to work
• Education: awareness about rights and duties; decreasing span of
reproduction- independence
• Structural transition- primitive agriculture to modern industry
• Multiple burden of work-family, work, education
Population Pyramid
JAPAN

• https://www.populationpyramid.net/world/2017/
Population pyramid and developmental
priorities
• Stage 2: greater focus on education and health of children and
mother; infectious diseases
• Stage 3: health of the elderly becomes crucial; higher education and
skill development needs greater attention
Greater social fractionalization
• Ethnic, linguistic and other forms of social divisions
• Civil strife or violent conflict
• Challenges for governance
• Problems of discrimination
• Diversity leads to conflict or cooperation
References
• Pranab Bardhan (1993) Economics of Development
and the Development of Economics; The Journal of
Economic Perspectives, Vol. 7, No. 2 (Spring, 1993),
pp. 129-142
• Todaro and Smith: Economic Development; XII Edition;
pages 57-72
• Ray D. (1998). Development Economics. Princeton
University Press; Introduction